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Pentagon, defense firms: What leverage?

The Pentagon and defense industry are unconvinced the shutdown fight gives them any more leverage to get rid of the sequester, which is set to take a $20 billion hit to the Pentagon's budget in January.

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Democrats and Republicans want to avoid another government shutdown, and sequester has already been mentioned as a key negotiation item.

Yet this week’s spending deal funding the government until January — the same time a new round of sequester cuts are set to hit — has sparked little hope in the defense world that a broader budget deal can be reached.

Democrats made it clear in the shutdown and debt limit fight they want to remove the sequester, and Republicans signaled a willingness to do so if the White House offers concessions on entitlements.

Such trade-offs are unlikely, however, given Democratic demands that tax hikes also be a part of the deal and the GOP's insistence on no new taxes.

“That's no trade,” Reid said in an interview with The Huffington Post less than 24 hours after the shutdown ended. “We are going to affect entitlements so we can increase defense spending? Don't check me for a vote there. I'm not interested in that," he said.

“There will not be a government shutdown,” McConnell told The Hill in an interview Thursday. “I think we have fully now acquainted our new members with what a losing strategy that is.”

The next step for Congress is a new bicameral budget committee, which was created in the spending deal and is tasked with seeking a larger budget agreement by Dec. 13, ahead of the government funding expiration date of Jan. 15.

For the defense industry, however, it sounds a lot like déjà vu, harkening back to the painful memories of the 2011 supercommittee whose failure set sequestration in motion.

“I don't know if a compromise can be reached, if some kind of an agreement can be reached to deal with these issues,” Hagel said on Thursday. “That's part of the uncertainty.”
Pushing the funding fight to January coupled with the 2014 sequester cuts adds to the uncertainty over the budget that that the defense industry and the Pentagon say has been hampering them since 2011.

“It’s Groundhog Day. All of the solutions are still the same,” said Mackenzie Eaglen, a defense analyst at the American Enterprise Institute. “Both sides have only seemed to harden their positions on entitlement cuts and tax increases, and the midterm elections are going to presumably keep those entrenched positions in place.”

The Aerospace Industries Association (AIA), which had led the defense industry’s fight against sequestration, is plotting to ramp up its campaign to warn about the damage that’s coming next year if sequester is not averted.

The trade association held a conference call this week with 100 member CEOs to discuss its strategy to lobby lawmakers and the administration to turn off the sequester cuts.

“We’re just trying to turn up the intensity,” said Dan Stohr, an AIA spokesman. “We’re staring down the barrel of a pretty intense cut.”

Sequestration cut $37 billion from the Pentagon budget in 2013, and would cut more than $20 billion more in January.

The sequester caps would represent a $52 billion cut from the Pentagon’s proposed 2014 budget, and the cuts would hit across the board if the budget is not adjusted.

The pessimism within the industry stems from the inability and unwillingness of Congress to tackle the sequester in multiple budget battles over the past two years. Defense officials are very skeptical that the new budget committee, which has no forcing mechanism, is going to be any different.

“I think we’ve got to prepare ourselves to live with sequester and a [continuing resolution] CR, and the two together are just a lethal combination to defense,” said one senior defense lobbyist. “Both parties can pay all the lip service that they care, but neither one is going to lift a finger to fix either one of these problems.”

Most lawmakers from both parties want to do away with the sequester cuts, but there’s deep disagreement about how to do so.

Republicans made clear during the shutdown fight that they intended to protect the topline level of the cuts, even if the defense hawks in the party desperately want to undo the cuts to the military.

And the Tea Party has cheered the sequester reductions, including those to the Pentagon.

The dangers sounded about sequester’s harm on the military has done little to change lawmakers’ minds about making a budget deal to avert sequestration.

“The big game is still about the budget — it’s not about defense, and there’s a strong constituency in the Republican Party to let it rip,” said Gordon Adams, a defense analyst at the Stimson Center.

“In a way sequester is an acceptable second best for everybody,” Adams said. “You can’t convince Republicans to put up taxes, you can’t convince Democrats to put up entitlements, and it’s sequester that absolves everybody of individual responsibility over what happens.”

The impact of sequestration this year has not been as intense as advertised by Pentagon leaders and the defense industry, which has hampered their efforts to reverse the cuts.

The cuts were mitigated somewhat in 2013 by a two-month delay and the use of unobligated funds, and defense firms had prior-year contracts to keep the cash flowing. But industry and Pentagon officials warn those tactics won’t be available much next year.

“What that means for the defense industry is fairly ominous,” said Loren Thompson, a defense analyst at the Lexington Institute who consults with several defense firms. “According to the Bipartisan Policy Center, the impact of sequestration will be twice as great in 2014 as 2013, and three times as great in 2015. So the cumulative impact is going to become bigger and bigger.”